The National Australia Bank now admits it had no legal right to demand funds from the sale of a musical instrument importer's home be used to pay his business debts.

Ross Dillon told the banking royal commission he would not have sold his home and broodmare farm in the NSW Hunter Valley if he knew he would end up with nothing.

NAB now concedes it had no legal entitlement to use the proceeds of the 2015 sale of the property, named Goanna Downs, towards the loans for Mr Dillon's National Music business.

That was only revealed when NAB executive Ross McNaughton appeared at the royal commission on Thursday.

Senior counsel assisting the commission Michael Hodge QC asked: "Is it fair to say you now understand that NAB had no lawful entitlement to insist on the full proceeds of Goanna Downs being used to pay down the debts of National Music?"

Mr McNaughton replied: "That's correct."

The general manager of NAB's strategic business services division said he had only realised the property did not directly secure the National Music debts when he reviewed his royal commission statement.

He initially believed NAB did have the right to insist all the proceeds were used to pay down National Music's debts, because of a personal guarantee and indemnity provided by Mr Dillon and his wife.

NAB in fact only held security over Goanna Downs for the Dillons' mortgage and personal borrowings, not for National Music's business facilities.

Mr Dillon told the inquiry he planned to use some of the money from selling Goanna Downs to reduce the business debts, but would not have gone ahead if he had realised "we weren't going to get a penny".

He was surprised when the bank told him it would take all the sale proceeds.

NAB's barrister Wendy Harris QC spent some time questioning Mr Dillon, including about his claim that he felt under pressure from the bank to sell the property.

She suggested NAB in fact supported National Music through some pretty difficult times and continued to do so.

Mr Dillon said the bank had been amazing, with the exception of the bankers around the time of the Goanna Downs sale.

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